WHAT DO THE SURGICAL STRIKES MEAN FOR INDIAN EQUITY MARKETS?

Economy | Published on 30th September 2016

On the morning of 29th September, the Indian Army carried out selective surgical strikes on terror establishments along the border in Pakistan Occupied Kashmir (POK). While the surgical strikes were on the cards after the terrorist attack at Uri, the timing and speed with which the Indian army and the political establishment acted took a lot of market participants by surprise. Having said that, it must be admitted that the strikes were carried out with a degree of sensitivity and focused intelligence gathering which ensured that the collateral loss to innocent lives was almost negligible.

The markets reacted quite violently to the news of surgical strikes, and the negative impact was felt on equities, bonds and the forex market. Mr. Dinesh Thakkar, our CMD, has observed, “Both the S&P Nifty and the BSE Sensex corrected by over 2% once the official briefing started as a direct outcome of the surgical strikes carried out by the Indian army on terror launch-pads along the LOC”. The INR also came under pressure as importers rushed to cover their dollar exposures and short positions on the USD rushed for cover. There are 3 possible outcomes that we can envisage as far as the markets are concerned:

Outcome 1: Powerful nations put pressure on India

Over 18 years back, there was a massive uproar after India conducted nuclear tests at Pokhran in May 1998. This was followed by trade and business sanctions resulting in deep erosion of market value. However, 2016 is a different ball game. Firstly, Indian surgical strikes were an outcome of a series of terrorist attacks on her soil. Secondly, military powers like the US, China and Russia realize that India had been stretched to its limit of patience. Hence, any negative reaction from global powers looks highly unlikely. As Dinesh Thakkar put it, “Markets may remain under pressure due to geopolitical pressure in the short term as investors will prefer to adopt a wait and watch approach”.

Outcome 2: Pakistan may escalate this into a full-fledged war

A full-fledged war would be a situation neither India nor Pakistan would be too keen on. For India, a full-fledged war would detract from its efforts for emergence as an economic superpower in Asia. At this point, the government would prefer to focus on its economic growth agenda rather than being drawn into a full-fledged war. Additionally, both India and Pakistan are nuclear powers and hence would not want to be drawn into a confrontation. From Pakistan’s point of view, they may not get the requisite support from China or the US to finance and sustain a full-fledged war. Pakistan would prefer to wage proxy war but even that is going to be negatively impacted after these surgical strikes. To that extent, this will be positive for the Indian economy as it will address the threat of perpetual terrorism at a very fundamental level.

Outcome 3: Historically, wars have been positive for Indian markets

That may sound a bit paradoxical, but it is borne out by past data. The Gulf War over Kuwait laid the foundation of the first major bull-run in India in 1992. The Kargil War actually laid the foundation of the IT-driven bull market in 1999-2000. Similarly, the US war against the Taliban in Afghanistan and against Saddam in Iraq laid the foundations of the multi-year bull market from 2003 to 2008. While these linkages and correlations may be hard to prove, a war has formed the basis for the 3 previous bull runs in the Indian markets.

Mr. Dinesh Thakkar is of the opinion, “It is pertinent to note that during 1999 Kargil War, markets eventually bounced back with more than 13% gains between the start to the end of the war. In my view, once the current issue also de-escalates, the markets will revert back to its fundamentals which remain strong for India”.

The next few weeks may be critical in determining the direction that the situation in South Asia may take in the light of these surgical strikes that India has conducted. Of course, that does not take away from the many fundamental advantages that the Indian markets possess like high GDP growth, earnings traction, rising consumer spending and benefits due to cheaper oil. At the end of the day, that is what will actually count in the stock market’s scheme of things.

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